Can You Sell a Car You’re Still Paying Off?

Understanding Your Vehicle Loan and Title

Selling a vehicle with an outstanding loan involves understanding how the loan impacts ownership. When a financial institution provides a car loan, they typically hold a lien on the vehicle. This lien is generally noted on the vehicle’s title document, indicating the lender’s interest.

The physical title document, which serves as proof of ownership, is usually held by the lender, not the borrower, until the loan is satisfied. The title is necessary for a legal transfer of ownership.

Before initiating any sale, obtain an accurate payoff amount from your lender. This figure is not simply the remaining principal balance; it includes any accrued interest up to a specific date, known as “per diem” interest, and potentially any fees. Lenders can provide a payoff quote valid for a certain period, often between 5 to 14 days, to ensure the exact amount needed to close the loan.

The precise payoff amount dictates how much money is required to clear the lien and acquire the title. This figure is compared against the potential selling price to determine if the sale will cover the loan entirely or if additional funds from the seller are needed.

Selling Approaches and Loan Payoff

When selling a car with an outstanding loan, the method of sale influences how the loan payoff is integrated. One common approach is a private party sale, where you directly sell to an individual buyer. In this scenario, the buyer’s payment might be made directly to you, or a joint payment can be arranged to both you and your lender.

Upon receiving funds from a private buyer, it becomes your responsibility to ensure the loan is fully satisfied. If the sale price exceeds the payoff amount, use a portion of the proceeds to pay off the lender. If the sale price is less than the payoff amount, you will need to contribute the difference from your own funds to clear the remaining balance. Once the payment is made, the lender will release their lien.

Alternatively, selling to a dealership, either as a trade-in or a direct sale, often simplifies the process. Dealerships regularly handle vehicles with existing liens and have established procedures for managing the payoff. They obtain the payoff amount directly from your lender and send the payment on your behalf.

After the dealership pays off the loan, any remaining equity—the difference between the sale price and the payoff amount—is either applied towards a new vehicle purchase or disbursed to you. If the vehicle’s value is less than the outstanding loan, creating negative equity, the dealership will factor this difference into your new purchase or require you to cover the deficit. This method streamlines the lien release and title acquisition for the seller.

Finalizing the Sale and Title Transfer

After your vehicle loan has been fully paid off, obtain the physical title document from your lender. Once the lender processes the final payment and confirms the loan is closed, they will initiate the lien release process. They will mail the unencumbered title directly to you, a process that can take anywhere from a few days to several weeks, depending on the lender’s policies and state regulations.

Upon receiving the clear title, you can formally transfer ownership to the new buyer. This requires signing the title document in the designated seller’s section; notarization may be needed in some jurisdictions. The buyer will then take the signed title to their local Department of Motor Vehicles or equivalent state agency to register the vehicle and obtain a new title.

Completing the sale involves additional paperwork beyond the title transfer. A bill of sale is a necessary document that details the transaction, including the vehicle’s make, model, year, Vehicle Identification Number (VIN), sale price, and the date of sale, along with signatures from both parties. This document provides proof of the transaction for both parties and can be useful for tax purposes or in case of future disputes.

Notify your state’s vehicle registration agency about the change of ownership to ensure you are no longer liable for the vehicle. Also, confirm with your former lender that the loan account is officially closed and that the lien has been removed from the vehicle’s record. This verification helps prevent future misunderstandings or liabilities related to the sold vehicle.

Citations:

https://www.dmv.org/buy-sell/selling-your-car/sell-car-with-lien.php